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Markets

The Ghosts of Markets Past

Jan Blakeley Holman, CFP, CIMA, ChFC, CDFA, CFS, GFS
Director of Advisor Education
30 Jul 2022
4 min read

We all know that past performance is not an indicator of future results, but how the markets have reacted to events in the past provides valuable perspective.

Ancient proverbs tell us, “Experience is the best teacher.” Modern proverbs add: “Assuming you know you’ve had an experience.”

If we’re to believe the proverbs, then, given our experience, we should know that:

  • Flooding the economy with money feeds inflation
  •  Sometimes inflation is greater than 2%
  • Interest rates do go up, especially when the Fed applies its decades-old, less-than-subtle technique of raising rates to slow demand for money
  • Investment bubbles still exist, and
  • Markets that go up, will go down

We’ve all heard that past performance is no indicator of future performance, but history has demonstrated that the economy and markets are governed by cycles that repeat themselves. In any given cycle, the events that cause any market downturn may be unique, but history has demonstrated that through bull markets, bear markets and recessions, over the long term the economy has always recovered and the stock market’s direction has always been up.

Here are some other things we’ve learned from experience:

When confronted with political or economic turmoil, stop, drop and roll. That is, roll away from any device you use to check the value of your investment accounts and don’t pay attention to the fluctuations. It’s wonderful that the financial services industry has given us ways to check the value of our investment and retirement accounts at a moment’s notice. Unfortunately, watching the value of those accounts drop in value during market downturns, makes investors want to run for cover, which is the last thing we should do. Remember, over the short term investment markets are volatile, but over the long term, they are smooth and stable.

Stocks are filled with helium on the way up and lead on the way down. If you paid attention during high school physics or you’ve watched your own individual securities, ETFs, or mutual funds drop in price during down markets, you’re familiar with this principle. In March 2020 the investment markets, as measured by the Dow Jones Industrial Average, dropped 6,400 points or 26% in four days. The cause – fear and uncertainty related to the COVID-19 lockdown. Chalk any high-velocity market decline to the primitive human “fight or flight” instinct. We see the market falling through the floor and the brain tells us, “This puppy is crashing, so I’m bailing out,” when it should be saying, “Another period of investor overreaction, I’m staying put.” Just so you know how much of an overreaction we experienced in 2020, we have never had another four-day period when the Dow fell by 6,400 points. When it comes to investments, what goes up slowly falls at the speed of light.

The sky is always falling…somewhere. You’ve probably heard a friend say, “It’s 5:00…somewhere,” when they want a drink at an hour that’s not considered the “proper” time for a drink. When it comes to investing, investors have been heard to say, “The sky is always falling…somewhere.” If an investor is looking for bad news, they’ll find it and when the news is bad, they want to bail out of their investments. Over the past two years, every event has become a crisis, and every “boo” has given investors a reason to sell. This year is no different. Inflation is at a 40-year high, interest rates have gone up dramatically and will continue to increase, the price of gas has reached historic levels, the Russian invasion of Ukraine continues, and we’re only halfway through 2022. The news has been so bad, that opportunistically, it must be good.

In the investment world, whenever you hear the expression, “new,” prepare for a bubble to burst. In the late 1990s, “New” was used to describe the economy. Pundits believed that instead of being driven by the factories that successfully manufactured the widgets and products that propelled the U.S. throughout the 20th, the economy would be driven by internet companies. The proponents of the “New Economy” believed that traditional economists were measuring the wrong data and investment analysts were applying archaic valuation standards to the market and individual stocks. Instead of being concerned that the stock prices were unjustifiably high, they suggested that for the first time since our evolution from an agrarian to an industrial economy, dot-com companies were the answer, the market was accurately valuing the opportunity these companies presented, and the future was a clean spreadsheet waiting for new formulas. It turned out that the “new economy” wasn’t really that new, that internet stocks weren’t the way forward, and that stocks selling at over 1000 times earnings do eventually crash and burn.

For the past few years, cryptocurrency has been hailed as the “new way to store money.” Unregulated, complicated and exceptionally volatile, cryptocurrency now looks like the “new way to lose money.” How many billions of dollars have been lost by people who couldn’t afford to lose money but who invested in crypto to get rich quick? Like other investment bubbles, time will tell us whether cryptocurrency will survive, but for now these companies are on life support.

When the going gets tough, investors get wimpy. According to the Investment Company Institute (ICI), as the markets have declined this year, investors redeemed $373,744M from their long-term funds from January – May 2022. When we compare that to the $81,237M they redeemed between January and May of 2021, we’re reminded that despite what history tells us, investors still don’t believe there’s a bungee cord when the markets step off the ledge.

That leads us to the final proverb which tells us, “The road to future profits is paved with lessons from the past…and a lot of patience doesn’t hurt either.”

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